Just like securities lending and repo margin lending is another way to raise or deploy cash using existing securities as collateral, also known as a margin loan or securities based lending.
It's essentially a revolving credit facility provided by a bank that allows investors to borrow against their equity holdings.
In simple terms, margin lending allows investors access to additional funds without selling their assets, so they can quickly take advantage of market opportunities such as buying during price dips, or increasing exposure ahead of expected gains.
Because the facility is pre-approved and secured by the portfolio, the investor can draw funds immediately without going through a new credit approval process.
Each time. From the bank's perspective, the facility is fully collateralized by the purchase securities.
The borrower can draw funds up to a maximum limit, and if earlier borrowings are repaid, those amounts can be redrawn much like a revolving line of credit.
Let's go through the key terms, term or maturity.
The facility can be structured either with a defined term, starting on a specific date and lasting for a set period or with a final maturity date, which defines when the lender's commitment to provide financing expires.
In both cases, it represents the period during which the bank agrees to make collateral backed funding available.
Up to the stated limit amounts, the agreement specifies a maximum drawdown limit, the highest amount the investor can borrow based on the collateral value.
Each drawdown may also have a minimum amount depending on the lender's internal credits or operational policies.
Interest. Interest is charged only on the utilized balance, not on the full facility size.
It's usually calculated as a reference rate plus a spread, for example, sofa plus 150 basis points.
The interest accrues daily and is typically settled monthly or quarterly, depending on the terms of the facility.
Other terms, well, additional conditions may include minimum amounts per drawdown.
Lenders often specify a minimum borrowing size for each drawdown to avoid the administrative cost of processing very small transactions, bullets, repayments of any outstanding balances at maturity and Ongoing loan to value or LTV ratio requirements that determine how much the investor can borrow relative to the market value of their portfolio.
If the value of the pledged securities falls and the loan to value ratio is breached, the bank will issue a margin call usually requiring the investor to post additional cash or additional eligible securities within one or two days.
If the investor can't meet the call, the lender has the right to sell part of the collateral to bring the loan back within limits.
